Another real life question asked on Reddit that we thought was an interesting topic and see how we can break it down the Hut Yee Way. There will be some information that will be redacted for privacy reasons.
Story:
Hey! Just purchased a new 2023 Hyundai Tucson Hybrid SEL Conv the other day and now I’m posting here at 3am with buyers remorse. I financed the car for $680/month (5.9% for 60 months. Im aware that dealerships don’t take returns but I’m messaging you all to see my options. I could afford the car but I will need to budget and I feel that if I need to budget to afford this car then maybe I shouldn’t have the car haha. It seemed like a very doable payment at the time but now Any advice is massively appreciated! I have no other loans or debts
Car Information:
Price: $35,950
Interest Rate: 5.9% for 60 months
Sales Tax + Registration Fee: $3,649
Down Payment: $8,000
Monthly Payment: $680
Other Monthly Car Payments: $330
Annual income: $105k
What Would You Do?
Curious about what you would do in that situation based on your experiences or, hopefully, based on what you’ve learned from this site? Have a think and select “show more” below to see what we would suggest.
A very popular rule of thumb that we agree with is the 20/4/10 Rule for buying cars. The general rule is:
- 20 – When buying a car, put at least a 20% down payment on the purchase.
- 4 – When taking out a loan, the term should at most be 4 years (48 months).
- 10 – The car’s monthly expenses (including loan payments, gas, insurance, etc) should not exceed 10% of your monthly income.
The rule above allows you to comfortably purchase and finance the car without putting too much stress on your finances. For most people, cars are probably the 2nd or 3rd most expensive item you will buy in your lifetime outside of investments. Houses and investments have a high chance of appreciating in value. However, cars depreciate in value the moment you drive off the dealer’s lot and they usually don’t last past 10 years of average driving.
So, utilizing the 20-4-10 rule and looking at the above example, the person’s down payment of $8000 satisfies this requirement. However, the sections where it does not satisfy the rule are the Term of the loan and the 10% of the monthly income.
While you might say, the person doesn’t have any other debts/loans. This is certainly true at the moment, but when life throws you a curve ball (ie an unexpected baby, marriage, a potential to buy a house, etc), by having a more than suggested car debt will certainly limit the possibilities for the new ventures.
So what could this person should have done? If a 2023 Hyundai Tucson was really what they wanted to buy, the only way to fit the rule is by putting a larger down payment. The monthly budget for all car expenses according to the $105k income is $875/mo (105,000/12*.10). Since other car expenses are $330/mo, that means the ideal monthly car payment should be $545/mo.
Using a car loan calculator and using a 6% rate, we see that in order to fit all the rules, a down payment of $16,500 would need to be made.
If the down payment feels high, then perhaps a 2023 Hyundai Tucson shouldn’t be the car that you buy.
show lessWe would like to emphasize that we are not financial advisors. The information provided on this website and in our YouTube videos is strictly for educational purposes and represents our personal opinions. To ensure the most appropriate financial decision for your specific needs, it is essential to conduct thorough research and, if necessary, consult with a licensed financial advisor. It is important to acknowledge that all investments involve inherent risks, and there is no guarantee of success in generating, saving, or investing money. Additionally, there is a possibility of experiencing losses when investing. Exercising prudence, making informed choices, and independently verifying information is crucial.
